‘Double-Double’ success with a simple menu

September 6, 2011 Categories: Portfolio Corner
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Simple Menu

What do defined contribution plan participants and fast food patrons have in common? Behaviors that need to be understood and tailored to in order to keep a customer base happy.

In “Redefining the Menu“, we explore what the DC industry can learn from IN-N-OUT Burger’s menu of hamburger, cheeseburger, double-double and fries. This simple yet satisfying menu of just four items has kept customers coming back since 1948.

The idea of limiting choices isn’t always popular.  It’s just human nature to want an endless amount of choices for almost everything. Just think of the number of options there are when buying a coffee, a phone, a mutual fund –  or almost anything these days.  Although a large selection satisfies our preference for personal choice, behavioral economics contrarily shows that individuals are more motivated to take action, and ultimately more satisfied with their choices, when options are limited.  IN-N-OUT Burger learned this lesson years ago, and we can apply the same concept to retirement plan investment menus.

Why does it work?

When you provide too many choices in an effort to satisfy everyone, the customer experience can be paralyzing, leading to poor decision making or an undesirable outcome. For retirement plans we want the convenient choice to also be the optimal choice for participants, setting them up for success. If you provide a limited menu of quality options, participants find it easier to choose the option that suits them best, leaving them more satisfied with their decision.

So what should a DC plan investment menu look like?

First you need to determine who the plan is trying to serve. In our observations, we’ve identified three typical participant profiles.

  1. Do it for me: Investors who are typically unengaged or lack the knowledge, interest or skill to make investment decisions. This profile generally represents the majority of plan participants.
  2. Do it with me: More engaged investors who want to understand their risk profile, they may talk to an advisor yet they don’t want to be responsible for the selection of investment managers, implementation or rebalancing. This profile generally represents a small but significant percent of participants.
  3. Do it myself: Investors who take a special interest in selecting and monitoring their own investments.  They are typically not satisfied with an investment menu line up and represent a very small minority of participants.

With these behaviors in mind, you can design a menu to satisfy their needs. Below we present solutions that may fit well for these types of investors.

DC Solution Menu

Using participant behavior to make a positive impact isn’t new. We’ve seen great progress in participation and savings rates when features like auto enrollment and auto escalation are implemented.

We think redefining the menu based on investor profiles is another step toward creating a more secure retirement for participants. Plan sponsors and plan advisors can benefit by having fewer investment options to monitor, scalable cost reductions , and yet more time to manage fiduciary liabilities and create the best solutions for participants and the plan.

Editors’ note: A previous version of this post linked to a PDF that has since expired. 

Brandy Swift is an account executive for the defined contribution channel within Russell’s private client services business. View Brandy’s bio »

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